Murphy USA Inc. (MUSA) Earnings Call Transcript & Summary

Thanks for joining us today. It's a pleasure to introduce Andrew Clyde, who is the President -- going into -- and Chief Executive Officer of Murphy USA. So it's -- actually, Murphy U.S.A. is one of the largest convenience store operators in the U.S. And this past year has been very exciting for Murphy as the company has executed very well against what has been an unprecedented operating environment for the convenience store channel, especially due to COVID. So there's definitely a lot to discuss this afternoon.

So let's just jump right into Q&A. Also as a quick reminder, please submit any questions you may have via the webcast, and I'll try to work them in. So Andrew, thanks again for joining us. First of all, your results in the first half of this year were very strong despite the challenging environment. And you filed an 8-K this morning, providing actuals for July and then some estimates for August and September. So could you walk through some of the key drivers of your business in Q3 so far, really, that are helping you emerge from COVID, what I would characterize as a stronger position, and essentially, maybe highlight for us some of the key advantages of your business model? And maybe how you think that might position your company for outperformance in the future, especially, as I think about the operating environment, hopefully, normalizing at some point soon.

Sure. Thanks, Bonnie, and it's good to see you again as well, and thanks, Goldman for inviting us to participate. Yes, we've tried to be as transparent as we can during this period of uncertainty with almost monthly 8-Ks coinciding with some investor conferences like this. And Q3 has been a pretty interesting quarter. And in some ways, we're almost getting back to talking about the business the way we used to be in terms of comp, but just at this new volume margin equilibrium. So if you think about from a fuel standpoint, whereas in the second quarter, we had falling crude oil prices and significant margins even while volume was recovering. It was largely a falling price environment, starting in July and certainly throughout all of August. We had a rising price environment, which was comping against last year's August, where prices fell. We grew volume about 7%. Labor Day fell in September this year versus August last year. And we had a major storm that both had prebuying and hit landfall in August this year, where the landfall of Dorian was in September last year. And so the way I would say look at the material that released today is that August and September kind of a blend of events when you look at comp in prior periods, but in a significantly tougher structural price environment this year versus last year. And so September maintains the volume momentum that we've seen. And I think product prices fell $0.08 yesterday. And so we're back into very attractive, well above normal margin environment. And so we expect to continue to see our fuel volumes continue to improve between now and end of the year. And as we said, look, we're less concerned about whether we end the year at 95% or 90%, knowing that the volume is being offset by the margin equilibrium. What's been really sustaining during this period is the tobacco sales. And again, there's some August-September blurring that's taken place, but we're continuing to be well north of 10% on our sales as we've taken share from other competitors because of our location, our price investments, our promotion investments, our in stocks and the fact that we sell cartons as people want to have fewer trips. And certainly, the one number on the page that has continued to grow is our nontobacco sales as both the general merchandise, from the PPE items that we're selling in the stores, along with innovation and the beer or the seltzer products, the stores that sell beer, wine, and alcohol have done especially well. So I'd say, generally, continued improvement. I think to your bigger-picture question about the advantaged business model, there's a number of things. One is, our locations are really advantaged being in front of Walmart and the supercenters, the majority of our stores. More of our stores are rural, so we've had less downside volume losses that you've seen in the urban markets. And I think we're going to continue to see benefits from both of those with Walmart Plus being associated with Walmart. And then as people figure out what the new normal is, we certainly believe in our markets. You're going to see less impact from remote work than in some of the larger markets. The enhanced value, we've talked about the new volume, margin equilibrium in fuel and our destination for tobacco. So more value for the customers where others have been typically raising prices. A lot of engaged associates, they saw right away, how much we cared about them, protecting them with personnel protective gear. We had a plexiglass screen program designed, implemented and installed within a week incentives for them, that one of the reasons why costs were higher in July as we implemented a kicker commission program in Q3. And I was happy to report that 80% of our stores were participating in enhanced commissions driven by higher sales. And I think having a strong balance sheet allowed us to kind of never take our foot off the gas in terms of investing in the customer and working capital and maintaining our investments in new stores. So just some of the highlights, I think, of our model.

Now that's great. It's a really helpful overview. So I'd like to maybe drill down a little bit further on some of those items. Maybe start with your fuel and your contribution, the total fuel contribution that you're guiding for 2020. It implies that your second half contribution will be a little lower than the first half. So I just kind of wanted to understand maybe some of the key drivers of that. And then possibly, is that just you being conservative on your guidance? And then as we look forward, and you look out to '21, which I know is challenging. I'm just trying to think through how realistic it is to think that your fuel margins or total contribution will be higher or possibly lower than when you compare it to actually 2019, where industry heading in the out years?

Yes. Look, the reality is investors are going to quickly put our second quarter in the rearview mirror. It was a unique set of coinciding events that started with the sharp falloff in crude prices that had that not happened, we would have been having a different conversation about, I think, the impact of COVID. But that created an environment where you had significant margins such that when the volume fell off, especially for the marginal independent who may have seen their volume fall off by 50%. So their breakeven requirement for profitability doubled. There was the margin to hold on to at that point in time for them to maintain their profitability. And that really sets the margin structure for the industry. And so volumes have recovered from the low for the marginal player and for us as well. And crude oil prices and product prices have recovered. So as we think about this new volume margin equilibrium, it's not about being conservative, but we're never going to see a Q2 set of circumstances like this without something yet similarly unprecedented. And our competitor peers, our friends that reported over the last 24, 48 hours, their recent quarters had that period in there as well. And that will quickly be put in the rearview mirror. So as we think about a world of an industry ending the year, maybe at 90% recovery, 85% to 90%, and I think our views will be at 90% to 95%. That marginal player is still going to be shy of what they needed for their same profitability from a fuel gallon standpoint. We've certainly taken away tobacco share that we're not planning on giving back. They've lost some food and beverage, and we'll see how that comes back versus other competitors and QSRs that have seen that business. And certainly, there'll be costs that will have implications. And many of them still haven't invested in EMV. So our view is the world is going to say -- is going to see higher margins going forward at the lower volume levels. And even I think if we get to 100% recovery by the end of 2021 as an industry, we'll probably still see higher-margin levels because of the net cumulative impact on the marginal players. And so that really sets the stage for our guidance and how we think about finishing this year, which we're going to put this year in the rearview mirror really quickly as well and focus on '21 going forward.

I think we all want to do that. Maybe to dovetail on some of the things you just mentioned, could you touch on your rewards program? What are some of the ways you've been able to leverage your Murphy Drive Rewards, especially since the start of COVID. And then it seems like you've been adding quite a few consumers at a pretty healthy clip. So just give us a sense of kind of where you're at in terms of what inning you are in with that program? And then you recently announced a new program with Walmart, in which your stores will now participate in Walmart Plus which sounds like it should help to drive better volumes. So maybe highlight how impactful that program might be for your business? And how -- the 2 programs will really work together.

Sure. So look, Murphy Drive Rewards, as we've talked about before, was a challenge because we're an everyday low price retailer. And I think one of the advantages we have as an everyday low price retailer is it's hard to sustain that position. But if you can and do as we have and made our everyday low-cost structure better, and with other players becoming less competitive in moving prices up, our advantage just grows. And so if we can add a complementary loyalty program that is designed to work in an EDLP environment, you're just delivering additional value economically to those customers. And today, look, the reality is, it's mostly pointed at fuel and tobacco. And because we continue to invest in price and promotion and inventory and in-stocks and supply chain and customer service during the COVID environment, we gained share from competitors who are pricing up, who didn't have cartons for sale in the first place. And so the added benefit of Murphy Drive Rewards benefited us and has created that stickiness and attractiveness that we expect to persist beyond the COVID environment. And then that translates into fuel as well. Now we're going to be able to point Murphy Drive Rewards at other categories, but it's one of many marketing tools we have. We noted that candy took a hit as we were rolling it out. Candy to really doesn't want to be on Murphy Drive Rewards in the same way. It wants to be upselled by engaged associates at the point-of-sale. But our food and beverage program, which is something that, frankly, wasn't a big part of our contribution during COVID, so there was less impact when we had to turn parts of it off, is something we can point Murphy Drive Rewards at as we rebuild that program, enhance it, make it more attractive in our larger formats and use MDR as a way to promote that, communicate that, drive awareness, trial acceptance going forward. We did something pretty unique recently, which was a Sweepstakes program. And we -- this is the first time we tried that, but consumers -- Murphy Drive Rewards members redeemed points against opportunities and we had weekly winners, and there's a lot of social media engagement around those winners. And there is a grand prize of 2 ATV's. And we were able to successfully burn 8x the breakeven that we were looking for in that program. So we're continuing to look at ways to make it more fun and exciting for our members, but also that improves the overall economics. You mentioned Walmart Plus. Walmart too is an everyday low price retailer. And so as they think about ways to build loyalty in programs, they went through the same journey that they did. And they found a calculus that works well for them, and not surprisingly, their consumer search found that gasoline continued to be a top benefit. And they naturally turned to us and says, can we extend this program to your network as part of introducing this program to our customers because they want a benefit. And so when 2 everyday low-price retailers come together with programs that are designed to work in that environment, we really expect it to be a win. And we work closely with them at record time with our own proprietary technology, working with their teams to get this ready for the launch. We believe this is really going to be about incremental upside to our business. We like to think about our current customer patterns is about 1 out of 7 customers pulling into a Walmart will turn into our stores. Meaning there are 6 out of 7 that aren't coming to see us or not very often. And we know from about 100,000 customer intercepts we did a few years ago, 50% of our customers were coming to us on a trip tour from Walmart. And so we believe that in Walmart's consumer search suggests these are a different customer that's willing to plunk down $100 a year for a membership program, but that's going to be a new incremental customer for us. And while we never have nor will we get into details about the specific cost-sharing of those programs, what I can tell you is it's designed to be a win-win-win. It's got to win first with the customer and then it's got to be win with Walmart to make it a sustainable program. And then it's got to win from our standpoint, meaning it's going to drive incremental customers and growth, and in no way puts our current customers at risk from a cannibalization standpoint. So we truly think this is going to be upside. And it was I think a great sign of a partnership that's just gotten stronger and stronger over the last couple of years with Walmart.

It seems to highlight the strengths of your business, like you mentioned, the low-cost provider. And as I think about some of the earlier comments you just made about the pricing environment, and how you really have this advantaged model and especially how well that's worked in this environment. As I think about the future and that gap between yourselves and your peers, do you think, and do that gap is going to widen? Meaning you will be able to potentially take even more share in the future? Or do you see an opportunity at some point for you to possibly take a little bit more pricing across the board?

Yes. I think this is and versus an or. I think it's going to be market-specific in terms of the dynamics where you say I can get volume, and I invest some of the margin at the same contribution or I can get both margin and volume. As we've noted before, whether it was the trends in tobacco or the trends in fuel, everything that we've seen in COVID was a gradual trend that was happening well before then that COVID only accelerated. And we're going to get back on the old trend wagon, if you will, after COVID. And the reality is, and you've pointed this out when you cover the industry before is the breakeven economics for the marginal players have continued to go up. They face volume pressure. They've faced market share pressure, they face cost pressure. And it's only going to continue in any different environmental scenarios that we see. One of the positives about gasoline convenience retailing as an industry is prices fluctuate $0.10, $0.20, $0.30, $0.40, $0.50 over any 12-month period. So customers are used to seeing price changes. And so if the marginal players cost structure goes up $0.05 or $0.10, that pales in comparison to the normal volatility we see from crude oil or product prices or other macro or discontinuous events that take place. And so if they have to pass-through slightly higher cost to maintain their profitability, they can do so with the full transparency of mega price signs, and as a low price competitor, we're able to determine do we take share. Do we take share and participate in the margin set by that higher cost structure? And I think as we noted in Q2, our breakeven has now gone to 0 or even negative. And so that gap has widened. And it's just a choice in market by market, how we choose to invest in margin, volume or to gain both.

Okay. Makes sense. Now let's switch gears a little bit and talk a little more about tobacco because you've obviously had great success during this period. You've been taking share. So I'm trying to think through as the environment possibly changes, do you expect this momentum to continue? You mentioned you've done very well with carton sales. But thinking about the consumer and the evolution, whether or not the government stimulus and where things shake out, I've got to imagine that starts to play a role in tobacco purchases. And how do you think through that? And maybe talk through any other levers that you might pull to drive continued tobacco momentum?

Sure. I think our performance reflects the fact that we have continued to invest in this category both from a pricing standpoint, but also an in-stock standpoint, a age verification, responsible retailer standpoint. And through the manufacturer's lens, they can see from a digital and loyalty standpoint, there are benefits that they see also. And in the face of COVID, what we saw were a number of retailers raising prices, not passing through promotions. Many of them were not able to maintain in stocks, reinvested millions of dollars in working capital, both to have in stocks and support once a way to deliveries to help support some of the co-marts initiatives. And so we actually improved our in-stock ratios during this period, by selling cartons, where many retailers don't. I visited a lot of rural markets over the Labor Day holiday. I went specifically into competitors that had either new management or it had a facelift, and none of them were selling cartons. And so I think as customers think about fewer trips, I don't know if that's a continued normal. But I think what they realized was they can get great value at Murphy USA in-stock on all their products, and some of those customers are just going to stick with us. And so regardless of how much stimulus is out there, whether it's continued unemployment levels. I think in a lot of our rural markets, we're continuing to see just a more steady buying behavior from those customers from the investments we've made in the category. You've always talked about the innovation in the tobacco category. And certainly, we've invested in the new innovative products, whether it was the vapor products. I think oral nicotine is now a trend where we've continued to invest in. Murphy Drive Rewards has been a big way for us to communicate to those tobacco users who are looking for an alternative. And so I think building upon the growth in the cigarette category, it also gives us the platform to invest and communicate to a much wider audience for the more innovative, lower risk products.

No, that's a good point. You're right. I do look into that a lot. And as that trend continues, that's also going to be a positive impact on your margins as your mix shifts because those margins are more attractive. So the other thing I wanted to understand is with this tobacco consumer, are you noticing that they are also adding to their ring. The basket size is going up. Even if they're purchasing a carton, is that also lifting other parts of the store, because certainly, your non tobacco business, your merchandise is performing very well also? So maybe touch on a few of those items as well and then I definitely want to drill down on the beverage side of the business.

Sure. I mean, we're absolutely seeing larger baskets, a high percentage of our tobacco products are Murphy Drive Reward members or participants. And so we can actually see their baskets and those MDR members have a better basket than the non-MDR members. One of the other things that we're seeing is that they continue to buy the premium products. They are not downgrading during this period. And so I don't know if that's a function of having some additional stimulus or they're just not spending somewhere else, maybe not eating out as much, saving by buying groceries more. But we have not seen any sort of down-purchasing behavior from customers as well, which has been positive.